1. Background
With reference to the NHB guidelines on the fair practice code, Aham Housing finance private limited (AHFPL) has adopted a set of guidelines, policies, procedures and interest rate model for its home finance business. The central idea of the interest policy are as follows;
A) Transparency in Pricing
B) Risk based pricing
C) Adequate disclosures and
D) Annualized interest rate working
2. Methodology
The lending rate to the customer in housing finance is a function of the following micro factors ,
The cost of funds on the borrowings, as well as costs incidental to those borrowings, taking into consideration the average tenure, market liquidity and refinancing avenues etc
Operating cost in the business
Inherent credit and default risk in housing finance business, particularly trends with sub-groups / customer segments of the loan portfolio
Nature of lending
Nature and value of securities and collateral offered by customers
Subventions and subsidies available, if any, from the developer
Risk profile of customer - professional qualification, stability in earnings and employment, financial positions, past repayment track record with us or other lenders, external ratings of customers, credit reports, customer relationship, future business potential etc.
Industry trends - offerings by competition
3. Interest Rate Policy & its approach with respect to Customer
The company shall adopt a discrete interest rate policy which means that the rate of interest for the same product and tenure availed during the same period by separate customers would not be standardized but could vary within a range, depending, amongst other things, the factors mentioned above. In case of any deviations required from the interest rate pricing structure, approval would need to be obtained from either the chief operating officer or the managing director.
The Company shall disclose the rate of interest and the approach for gradations of risk and rationale for charging different rates of interest to different categories of borrowers in the application form and communicate explicitly in the sanction letter.
The rates of interest and the approach for gradation of risks shall also be made available on the company web-sites or published in the relevant newspapers. The information published on the website or otherwise published would be updated whenever there is a change in the rates of interest.
The interest reset period for floating / variable rate lending would be decided by the company from time to time, applying the same decision criteria as considered for fixing of interest rates. *
The interest rates offered could be on fixed basis or floating / variable basis as per the customer’s requirement. The company would prefer to offer floating rates to customers in the interest of both the customer and the company, since the borrowing cost for the company is subjected for yearly revision by banks and financial institution.
Wherever the customer requests for a reduction in the interest rate on a floating rate loan on the basis of competing sanctions available from other lenders, the company could approve a reduction in the floating interest rate, upon the payment of the switch fee of up to 0.50% by the customer, subject to the condition that the customer has been paying its EMIs on time for the past 18 months.
Annualized rate of interest would be intimated to the customer
Besides normal interest, the company may levy additional interest for ad-hoc facilities, penal interest for any delay or default in making payments of any dues. The Company shall mention the penal interest in bold in the loan agreement. Interest would be charged, and recovered on a monthly basis.
Interest rates would be intimated to the customers at the time of sanction / availing of the loan and the EMI apportionments towards interest and principal dues would be made available to the customer.
Interest shall be deemed payable immediately on due date as communicated and no grace period for payment of interest is allowed.
Interest changes would be prospective in effect and intimation of change of interest or other charges would be communicated to customers in a manner deemed fit, as per the terms of the loan documents.
Besides interest, other financial charges like processing fees, cheque bouncing charges, prepayment/ foreclosure charges, part disbursement charges, cheque swaps, cash handling charges, RTGS/ other remittance charges, commitment fees, charges on various other services like issuing NO DUE certificates, NOC, letters ceding charge on assets/ security, security swap & exchange charges etc. would be levied by the company wherever considered necessary. Besides the base charges, the service tax and other cess would be collected at applicable rates from time to time. Any revision in these charges would be with prospective effect. A suitable condition in this regard would be incorporated in the loan agreement. These charges would be decided upon collectively by the management of the Company.
The practices followed by competitors would also be taken into consideration while deciding on interest rates / charges.
Interest rate models, base lending rate and other charges, and their periodic revisions are made available to AHFPL’s prospective and existing customers through its offices and branches. Prior to entering into an agreement with the customers, the company provides with the statement of charges and interest. The company resolves their queries and questions Around the same, to their satisfaction.
loan officers ensure charges and rates of interest are explained clearly and transparently to the people who may be interested in AHFPL’s products.
In case of staggered disbursements, the rates of interest would be subjected to review and the same may vary according to the prevailing rate at the time of successive disbursements or as may be decided by the company.
Claims for refund or waiver of such charges/ penal interest / additional interest would normally not be entertained by the company and it is the sole and absolute discretion of the company to deal with such requests.
* Components in Interest rates
| Weighted Average Cost of Funds as on 1st April 2019 – Note 1 |
10 % |
| Average Risk premium (All grades) – Note 2 |
1 % |
| Liquidity premium |
1.5% |
| Overheads & Cost of operations – Note 3 |
2.5% |
| Aham Base Rate (ABR) – Note 4 |
15 % |
Notes:
1. Weighted Average Cost of Funds is an average of the following, weighted with their respective outstanding amounts:
- Borrowings were Nil as on date.
- Net worth of Rs 12 crores as on 1st April 2019 – Assumptive cost of capital of 10 %
2. Average Risk Premium is an estimate of the average cost of managing the risk inherent in lending towards housing sector. Pricing of loans to customers would vary on a case to case basis, depending on the merits of each individual case which would be evaluated separately in detail during the underwriting process. The parameters which predominantly influence risk are, but not limited to, listed below:
- Product: Product risk is evaluated based on the nature and time-line of the end-use. For example, products like purchase of new property and self-construction, which have, immediately verifiable end-use, have a lower risk associated with them.
- FOIR (Fixed Obligation to Income Ratio): This metric quantifies the serviceability of loan by the customer based on their assessed incomes and expenses. A lower FOIR indicates higher serviceability and hence lower risk, and vice-versa.
- LTV (Loan to Value ratio): The LTV for a loan indicates the extent of security cover available of the loan amount. A lower LTV indicates lower risk and vice-versa.
- Incidental risk factors: Certain risks may be exceptionally identified while underwriting a loan application, attributing to the aspects like customer behavior, geography-specific risks, etc. The risk from these factors, and the costs associated with managing them, are to be evaluated on a case to case basis.
3. The cost of premium is assumed at 2.5 % which is also the average cost of operation for a fairly grown company with an AUM of Rs 2000 Crs in the industry. The cost of operation during the formative years of Aham Housing Finance will be much higher but for the sake of applying a reasonable cost to derive benchmark rates a conservative approach is taken.
4. The first component as mentioned in the above table would largely impact BR.